US dollar: a change to the best?

US dollar has been declining for almost 30 years because of weaker economic growth and more recently because of the Fed’s flooding the financial system with cheaper currency. Yet, last week the dollar index, a measure of the greenback’s value against currencies of the United States’ major trading partners, reached the highest level in almost 3 years.

Among the USD-positive factors one may name signs of strength in the American economy which is in much better shape than Europe or Japan, stock market boom and the prospect of the US becoming a net oil exporter in the next few years.

Deutsche Bank points out that this year USD “is no longer a risk-on, risk-off currency”. Unlike the dynamics in the previous years the greenback now moves in tandem with the S&P 500 stock index. This is regarded as a bullish sign for the currency as it means that foreign investors are moving into US equities and snapping up USD to do so. According to the data from the US Treasury released this month, foreign holdings of American stocks and bonds have more than doubled since 2005.

So, there are reasons to expect USD to strengthen broadly in the longer term. “The dollar has already risen but this is just the beginning,” say analysts at HSBC.